Business Litigation Reporter - June 2016

Goodwin Procter’s Business Litigation Reporter provides timely summaries of key cases and other developments within dedicated Business Litigation sessions and related courts throughout the country – courts within which Goodwin Procter’s Business Litigation attorneys are continually litigating. In addition, each issue of the Business Litigation Reporter provides a more thorough discussion of one topic of particular importance to the business community. In this issue, we discuss the expanding cyber insurance market and issues companies should consider when deciding whether or not it may be right for them.

California

Arbitration Clause That Authorizes Preliminary Injunctions in Court is Enforceable. In Baltazar v. Forever 21, Inc., S208345 (Cal. Mar. 28, 2016), the California Supreme Court upheld an arbitration clause in an employment contract that also permitted the parties to seek preliminary injunctive relief in court. The employee argued that such injunctive relief is more likely to be sought by the employer, making the provision intolerably one-sided, but the court held that this provision merely confirmed the parties’ existing statutory rights to seek such relief and thus was not substantively unconscionable. The court also rejected the employee’s argument that the arbitration clause was unconscionable because it listed only employee claims as examples of ones subject to arbitration, noting that the agreement expressly provided that arbitrable claims “include[d] but were not limited to” the listed examples.

Whether a Product’s Visual Layout Is Functional, Thus Defeating a Claim for Trade Dress Infringement, Is Intensely Factual. The Lanham Act protects “trade dress,” which is a product’s total image, but not its functional features. In Millennium Lab., Inc. v. Ameritox, Ltd., No. 13-56577 (9th Cir. Apr. 4, 2016), the plaintiff argued that the defendant copied its aesthetic design for displaying urine test results, while the defendant argued that its layout was functional. The Ninth Circuit emphasized that functionality is “generally viewed as an intensively factual issue” and held that summary judgment should not have been granted to the defendant. The court explained that (1) although a comparison of test results is functional, the precise format in which the results are presented “is not necessarily functional,” and (2) the format adopted by the plaintiff was designed to distinguish its product from its competitors.

Individual Held Jointly Liable for FTC Violation May Be Ordered to Pay Restitution Beyond Personal Gain. In FTC v. Commerce Planet, Inc., No. 12-57064 (9th Cir. Mar. 3, 2016), the Ninth Circuit addressed the amount of restitution that a corporate officer can be ordered to pay under the FTC Act, which prohibits unfair or deceptive business practices. The company had settled with the FTC but the individual officer was held liable for violating the Act; the district court ordered him to pay restitution of $18.2 million, which was the amount that the company had unjustly made. The defendant argued that a restitution award must be limited to the gain that the individual defendant personally received, but the panel held that an individual who is held jointly and several liable for an FTC violation may be ordered to pay restitution for the entire benefit that was unjustly obtained.

Delaware

Demand Futility Assessed Based on Composition of New Board, Even Though Constituted After Shareholder Derivative Complaint was Filed. In Park Employees’ & Retirement Board Employees’ Annuity & Benefit Fund of Chicago v. Smith, 2016 Del. Ch. 82 (May 31, 2016), Vice Chancellor Glasscock considered a “twist” on the requirement of Rule 23.1 that a stockholder intending to file a shareholder derivative suit must either first make a demand upon the board or show that the demand is excused. The court noted that “whether demand is excused is typically analyzed with respect to the directors seated as of the date that the complaint was filed.” But the court found that because a new board was in place just four days after the Complaint was filed, the new directors had been disclosed and were uncontested in the board election, and the Complaint was not served until several weeks after the board change, it was proper to analyze demand futility based on the composition of the new board since that board “was in a position to actually assess the Plaintiff’s Complaint.”

Registration to Do Business Is Not Consent to General Jurisdiction. In Genuine Parts Co. v. Cepec, 2016 Del. LEXIS 247 (Del. Apr. 18, 2016), the Delaware Supreme Court, overruling a 1988 decision, held that an out-of-state company’s registration to do business in Delaware did not constitute consent by the company to general jurisdiction in Delaware courts. General jurisdiction means that a company can be sued in the state’s courts even over disputes that have nothing to do with the state. The court reasoned that interpreting Delaware law to infer consent to general jurisdiction from merely registering to do business “collides directly” with the United States Supreme Court’s decision in Daimler AG v. Bauman, which held that a company typically is subject to general jurisdiction only in its state of incorporation and principal place of business. For more information on this jurisdictional issue, see Daimler Turns Two: Personal Jurisdiction Over Out-Of-State Mass Tort Defendants In The Wake Of Daimler AG v. Bauman.

Inspection of Corporate Records Conditioned on Their Incorporation in Full into Any Future Derivative Action Complaint. In Amalgamated Bank v. Yahoo! Inc., No. 10774-VCL (Del. Ch. Ct. Feb. 2, 2016), the Chancery Court granted in part an investor’s Section 220 demand to inspect Yahoo’s corporate books and records, but imposed a condition under which the produced documents “will be deemed incorporated by reference in any derivative complaint that [the investor] may file relating to the subject matter of the demand.” The court held that such a condition would protect the legitimate interests of both the company and the courts by ensuring that any future complaint “will not be based on cherry-picked documents.” That is so because a court ruling on a motion to dismiss can consider any documents incorporated into the complaint, and hence the court will be able to consider all of the produced documents in their entirety, not just the documents (or parts of documents) quoted in the future complaint.

Massachusetts

Parties Cannot Contract for Broader Judicial Review of Arbitration Awards. In Katz, Nannis & Solomon, P.C. v. Levine, 473 Mass. 784, 46 N.E.3d 541 (Mar. 9, 2016), the parties’ arbitration agreement purported to allow judicial review “in the event of a material, gross and flagrant error” by the arbitrator. The SJC however, held that the parties cannot modify the standard of review under the Massachusetts Uniform Arbitration Act for Commercial Disputes (MAA), which lets a court vacate an award only if it “was procured by corruption, fraud or other undue means” or “the arbitrators exceeded their powers.” In so ruling, the court relied both on the plain language of the MAA and the policy considerations weighing against expanded judicial review of arbitration awards.

Merger Clause in Counteroffer Avoids Battle of the Forms. In Liddell Brothers, Inc. v. Impact Recovery Sys., Inc., No. 15-13226-FDS (D. Mass. Mar. 21, 2016), the seller transmitted a price quote with a Texas forum-selection clause, and the buyer responded with a purchase order containing both a Massachusetts forum-selection clause and a merger clause providing that “any additional or different terms and conditions proposed by vendor are expressly rejected.” After litigation ensued, the court held that the Massachusetts forum-clause controlled. The court acknowledged that if this were a classic “battle of the forms” case, one might “knock-out” both conflicting clauses. But because the buyer’s purchase order had a merger clause, it could not be viewed as acceptance of the seller’s price quote, but rather constituted as a counteroffer. The seller’s signing of the purchase order thus constituted acceptance of that counteroffer, including its Massachusetts forum-selection clause.

Independent Panel Denied in Derivative Suit Against Officer of Closely Held Corporation. In Kelleher v. Squires, No. 15-CV-03125-BLS2, 2016 WL 377037 (Mass. Super. Ct. Jan. 26, 2016), the half-owners of a closely held Massachusetts corporation filed a derivative suit, on behalf of the company, asserting claims for conversion and gross negligence against the other half-owner, who was also the corporation’s sole officer and director. The court denied the defendant’s motion to appoint an independent panel to decide whether to let the derivative suit proceed. The court held that appointing an independent panel would mean “taking away power to exercise business judgment that is normally reserved to the board of directors and shareholders and giving it to strangers.” Id. The court acknowledged that the defendant would not be able to participate in the shareholder vote on proceeding with the derivative suit because he was its target. But the court held that the defendant had not rebutted the presumption that the plaintiffs (the remaining shareholders) should be trusted to exercise their business judgment on behalf of the corporation and had made no prima facie case that the suit was against its best interests.

New York

Common Interest Doctrine Requires Actual or Anticipated Litigation. On June 9, 2016, the New York Court of Appeals held in Ambac Assur. Corp. v. Countrywide Home Loans, Inc. that the common interest doctrine – under which an attorney-client communication remains privileged if it is shared with a party holding a common legal interest – applies only if the communication related to actual or anticipated litigation. The court held that absent such litigation, there is no proven need for parties holding a common interest to share privileged communications and the risk of losing relevant evidence is too great. The court acknowledged that the Restatement and some federal courts have reached an opposite conclusion, but it decided to retain what it deemed the historical New York rule limiting the scope of the doctrine.

Court Decides Whether Arbitration Agreement Exists but Arbitrator Decides Whether Dispute Is Covered by Arbitration Clause. In Consolidated Precision Prods. Corp. v. General Elec. Co., 2016 U.S. Dist. LEXIS 62999 (S.D.N.Y. May 12, 2016), Judge Castel addressed the respective roles of a court and an arbitrator in deciding whether a dispute filed as a court lawsuit is subject to arbitration instead. GE moved to dismiss the case for lack of subject-matter jurisdiction based on the existence of an arbitration clause, but the court held that GE’s argument went to arbitrability rather than jurisdiction. The court then held that GE met the first requirement for compelling arbitration by showing that the parties had entered into an enforceable arbitration agreement, and the court then stayed the case to allow the arbitrator to determine whether the parties’ dispute fell within the scope of that agreement to arbitrate.

Non-Party Sued for Interference with Contract May Invoke Contractual Choice-of-Law Provision. In Bausch & Lomb Inc. v. Mimetogen Pharms, Inc., 2016 U.S. Dist. LEXIS 59941 (W.D.N.Y. May 5, 2016), Mimetogen sued third-party defendant Valeant, which had acquired Bausch & Lomb (“B&L”), alleging that Valeant tortiously interfered with Mimetogen’s contract with B&L. The court held that even though Valeant was not a party to the contract between B&L and Mimetogen, and thus normally could not enforce the terms of that contract, Valeant could invoke the choice-of-law provision in that contract because Mimetogen’s tortious-interference claim against Valeant arose from and relied upon the contract between B&L and Mimetogen. The court explained that choice-of-law and arbitration clauses are exceptions to the usual rule that only parties to a contract can enforce its provisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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